1937 (11) TMI 4 - Other - Income Tax

Privy Council directs reassessment of income tax computation due to incorrect accounting method.

COMMISSIONER OF INCOME TAX, BOMBAY Versus SARANGPUR COTTON MANUFACTURING CO. LTD.

COMMISSIONER OF INCOME TAX, BOMBAY Versus SARANGPUR COTTON MANUFACTURING CO. LTD. - [1938] 6 ITR 36 (PC) Issues Involved:1. Computation of profits or gains under Sec. 10 of the Indian Income Tax Act, 1922.2. Method of accounting regularly employed by the assessee under Sec. 13 of the Act.3. Valuation of opening and closing stock for the assessment year.4. Whether the Income Tax Officer (ITO) correctly computed the income based on the method of accounting employed by the assessee.Issue-wise Detailed Analysis:1. Computation of Profits or Gains under Sec. 10 of the Indian Income Tax Act, 1922:The case revolves around the assessment of the respondents for the financial year ending March 31, 1932, focusing on the computation of profits or gains for the year ending December 31, 1930. The respondents, a limited liability company, submitted a return under Sec. 22(1) of the Act, including a copy of the audited balance sheet and profit and loss account, showing a profit of Rs. 2,64,086. However, adjustments were made for stock undervaluation, leading to a different total income figure.2. Method of Accounting Regularly Employed by the Assessee under Sec. 13 of the Act:The High Court initially ruled that the covering letter accompanying the return formed part of the method of accounting employed by the assessee. The High Court opined that the ITO was not entitled to split the method of accounting and should consider the profit and loss account along with the covering letter. However, the Privy Council disagreed, stating that Sec. 13 pertains to the method of accounting employed for the business's purposes, not for making up the statutory return for assessment.3. Valuation of Opening and Closing Stock for the Assessment Year:The respondents contended that the undervaluation of the closing stock for 1929 should be added to the opening stock of 1930, and the undervaluation of the closing stock for 1930 should also be considered. The ITO, referencing the Privy Council's decision in Commissioner of Income Tax, Bombay v. Ahmedabad New Cotton Mills Co. Ltd., rejected this claim, stating that undervaluations should either both be considered or both be disregarded. The ITO accepted the profit shown in the profit and loss account without considering the undervaluations.4. Whether the ITO Correctly Computed the Income Based on the Method of Accounting Employed by the Assessee:The High Court had amended the question to whether the ITO was entitled to compute the income based on the profit and loss account without regard to any undervaluation of the stock. The Privy Council found that the ITO did not exercise his judgment under the proviso of Sec. 13, which requires considering whether the income, profits, and gains can be properly deduced from the accounts. The ITO and the Assistant Commissioner both failed to perform this duty, leading to the conclusion that the profit shown in the profit and loss account was not the true profit for income-tax purposes.The Privy Council concluded that the method of accounting employed by the respondents did not show the true income, profits, or gains. Therefore, the question was amended to whether the ITO was right in computing the income based on the method of accounting when it did not show the true income, profits, and gains. This question was answered in the negative, and the appeal was dismissed with costs. The ITO was directed to properly discharge his duty under Sec. 13 in light of the expressed opinions.Conclusion:The Privy Council advised that the High Court's order should be varied by substituting the amended question, which should be answered in the negative. The appeal was dismissed with costs. The ITO was instructed to reassess the income, profits, and gains properly, considering the method of accounting employed by the assessee and ensuring it reflects the true income for tax purposes.